TAX CREDITS & DEDUCTIONS
Child Tax Credits
You can receive a $1,000 tax credit for every dependent child who is under the age of 17 at the end of the 2007 tax year. A phase-out of the credit, based on modified AGI applies ($75,000 - single, $110,000 - married/joint, and $55,000 - married/separate).
The $10,630 adoption tax credit for couples who adopt a child is also available. A modified AGI phase-out also applies.
You are allowed to take either the standard deduction or itemize your deductions on your tax return, whichever benefits you the most. If you itemize, it's important to keep complete and accurate records that reflect every dollar going toward the total of non-business income and property taxes, interest expense, medical expenses, and charitable contributions.
A significant portion of itemized deductions is excluded if your AGI exceeds annual threshold amounts. If you are subject to these limitations, especially if your income fluctuates from year to year, consider "bunching" your itemized deductions into this year and taking the standard deduction next year.
Standard deductions* for 2007 are listed below:
|Married filing jointly||$10,700 |
|Head of household||$7,850 |
|Married filing separately||$5,350 |
|Additional deduction for blind or elderly|
| Single or head of household||$1,300 (either/or) $2,600 (both) |
| Married||$1,050 (either/or) $2,100 (both) |
|* Deduct the greater of standard or itemized |
Medical expenses which exceed 7.5% of your AGI are deductible from your taxable income if they are not reimbursed by insurance. Medical expenses include the costs of health insurance premiums, medical and dental services, prescription drugs, and so forth. If you are like many taxpayers, and your medical expenses fall short of that 7.5% limitation, consider "bunching" your discretionary medical expenses and procedures into one year, participating in your company's cafeteria plan, or setting up a medical savings account.
A portion of any qualified long-term care premiums you pay is also deductible. We suggest you seriously consider taking out long-term care insurance now to realize big savings by locking into the current premium rates for the entire coverage period.
But be sure to shop around since premiums, coverage, and limitations can vary tremendously.
Self-Employed Health Insurance
Good news for self-employed individuals.* You can now deduct 100% of your health insurance premiums as an "above the line" deduction. The percentage goes up to 100% in 2003. If you're self-employed and employ your spouse, you can pay for and deduct 100% of the spouse's medical insurance costs (including the cost of coverage for the employed-spouse and any dependents) while the spouse reports no taxable income. However, your spouse must be a bona-fide employee who actually performs legitimate services for the enterprise, receives W-2 wages, and is treated as an employee for employment tax purposes.
* Sole proprietors, partners in partnerships, members of Limited Liability Companies, and certain employee/shareholders in S corporations are also considered self-employed.
Employ your spouse in a legitimate job capacity if you're self-employed. This will enable you to deduct 100% of the spouse's medical insurance plan premiums.
Only a few states can survive without assessing a state-level income tax. If you don't live in those states, you must send a sizable chunk of your income to the state office of revenue. But, there are a couple of ways that state income taxes can be used to your advantage. You may deduct your state income taxes on your federal return, and if you may pay the estimated state income taxes typically due on January 15th by December 31st, you'll gain a larger federal deduction for the current year.
If you don't make estimated tax payments, you can ask your employer to withhold more state tax in the calendar year, which will also increase your deduction. If you overpay, intentionally or not, the refund you receive from the state will, in turn, be taxed by the IRS in the year the refund is received. In addition to state income taxes, most of us have to pay personal property taxes on the value of our property, whether it is real estate, cars, or motor homes. While property taxes can be burdensome, they are deductible on your federal tax return. Sales taxes, registrations, licensing, and other fees are not deductible. Special assessments on real estate are also not deductible because you derive specific benefits from them.
The same principle may hold true for paying property taxes before December 31st as with prepaying your state taxes - doing so could give you a greater deduction in the current year. However, if you are subject to the Alternative Minimum Tax (AMT) this year, you may not benefit from nonbusiness tax deductions. So, please talk with us before prepaying any taxes.
Buying or selling a home will affect your real estate tax deductions. Be sure to keep closing statements on which the apportionment of the taxes between the buyers and sellers is shown; they'll help you calculate the deductions.
All interest paid on qualified residential mortgages that do not exceed $1 million (including points paid to obtain a mortgage), most home equity loans up to $100,000, and business debt is deductible. Interest on loans used for investment purposes is deductible within limits. And, interest expense related to certain passive activities may also be deductible. You are allowed to deduct interest expense as long as it's paid during the tax year on a valid debt.
If you're subject to the phase-out of itemized deductions discussed earlier, consider paying off your home mortgage early. Many taxpayers are unaware that only an amount equal to the taxpayer's tax rate, multiplied by the annual mortgage interest and property taxes paid, is actually deductible. For instance, if you pay $1,000 in mortgage interest and property taxes this year, and you are in the 27% tax bracket, the $1,000 deduction would save you only $280 in income taxes. Since you may be receiving little if any tax benefit from this interest expense anyway, eliminating it may give you a tax-free rate of return on the prepayment amount equal to your old mortgage interest rate. See the section on homeowner issues for more information.
You cannot deduct interest incurred on credit cards or loans for purchases of consumer items, such as appliances and cars. In addition, you cannot deduct interest paid on a loan used to purchase tax-exempt securities. If you have a significant amount of personal debt, consider replacing it with a home equity loan to avoid nondeductible interest payments. But, be aware that limitations apply, and if you default on the load, you could lose your home.
For 2001 and thereafter, students and parents can deduct up to $2,500 of interest paid on student loans as an "above-the-line" deduction, which allows even nonitemizing taxpayers to obtain a tax benefit. The borrowed funds must be used for necessary qualified higher education expenses, such as tuition, fees, room and board, and books. A phase-out, based on modified AGI, applies ($50,000 - $65,000 - single and $105,000 - $135,000 - married). The deduction is only available for the first 5 years of repayment.
With the curtailment of government social programs well underway, making charitable donations will take on added importance to the well-being and survival of many charities. You may deduct the amount of cash or the fair market value of certain property you donate to qualified charities (the deduction is subject to certain limitations). However, if you receive something in return for your donation, you must reduce your deduction by the value of that item or service. For example, if you donate $150 to a charity and receive a book worth $30, your total deduction would be limited to $120. By law, the charity has to inform you of the item's value.
You cannot deduct the value of your time or services contributed to a charity. But, you may deduct out-of-pocket expenses (i.e. uniforms), including a 14 cents per mile deduction for charity-related driving.
Get a professional appraisal for donations worth over $5,000 (other than publicly traded securities) and nonpublic stock worth over $10,000. To deduct property donations worth over $500, you must provide additional information with your federal tax return. An overall limit of 50% of AGI applies to total annual charitable contributions. Charitable contributions may be carried forward 5 years.
Giving Cash and Property To Charities:
The kinds of records you must keep for charitable contributions depend on the amount of the contribution and whether the contribution is in cash. For information on contributions, see Publication 526, Charitable Contributions.
Contributions from which you benefit: Generally, if you make a charitable contribution that is more than $75 and is partly for goods or services, the organization must give you a written statement that you should keep.
Cash contributions include those paid by cash, check, credit card, or payroll deduction.
For each cash contribution, you must keep one of the following: A canceled check or a financial account statement, receipt from the organization showing the name of the organization, the amount, and date of the contribution. Note: for single gifts under $250.00 (per occurrence) if you do not have the receipt, or misplaced it, does not mean you cannot deduct the contribution on your income tax return. Furthermore, you can use estimates when needed, as long as, the estimates are rationale and reasonable.
Cash Contributions of $250 or more
You can deduct a contribution of $250 or more only if you have a written acknowledgment of your contribution from the organization.
Out -of-pocket expenses
You should keep records of your out-of-pocket expenses when you perform services for a charitable organization. You can record these expenses in a diary. For example, if you use your car when doing volunteer work, you should record the name of the organization and the non-reimbursed gas and oil expenses directly related to the volunteer work. If you do not want to keep records of your actual expenses, you can keep a log of the miles you drove your car for the charitable purpose and use the standard mileage rate shown in Publication 526. You should also keep records of any parking fees, tolls, taxi fares, and bus fares.
For each contribution of property, you must keep a receipt from the organization showing:
- The name of the organization
- The date and location of the contribution
- A reasonably detailed description of the property.
A letter or other written communication from the organization containing the above information will serve as a receipt. You also must keep reliable written records for each item of donated property.
These records must include:
- The Fair market value of the property at the time of the contribution
- Cost or other basis of the property
- Terms of any conditions attached to the contribution.
Donating appreciated capital gain property to charity has many tax advantages. When you give appreciated property, the amount of your deduction is the value of the property rather than its cost, and you are never taxed on the amount of appreciation. The charity also benefits because it can sell the property and not pay taxes on it. In the case of property contributions, an annual deduction limit of 30% of AGI applies.
Sell depreciated property and donate the proceeds to charity, since you may be able to deduct both your capital loss and your contribution. If you give depreciated property directly, you may deduct the fair market value of the property, but you won't be able to deduct the loss.
For more information on donated property, see Publication 526.
As a way to encourage taxpayers to invest more, our tax law allows a deduction for interest on loans used to purchase an investment. You can deduct all of your interest up to the total of your net investment income (gross investment income less investment expenses). Net capital gain from the disposition of investment property isn't considered investment income. You may elect to treat net capital gains as investment income by subjecting these gains to ordinary income tax rates. You may also carry forward interest deductions that cannot be fully used currently because of the limitation and apply them to future years.
In addition, you can deduct ordinary and necessary investment expenses (except those related to tax-exempt investments) as miscellaneous itemized deductions subject to the 2% of AGI limitation. Deductible expenses in this category include costs of research (i.e., relevant subscriptions and professional advice) and security measures (i.e., safe deposit boxes).
Expenses which are not directly deductible include stockbrokers' fees, advertising, legal fees, or title insurance - all of which are usually treated as adjustments to the purchase or sale price of the investment.
Tax-Related Professional Expenses
On your personal return, you may deduct any ordinary and necessary professional fees related to the determination, collection, or refund of any tax imposed on you by any level of government or by any foreign government. The fees are also considered to be miscellaneous expenses, and thus, are subject to the 2% AGI limitation.
Other personal legal expenses are generally not deductible. For example, the expense of acquiring, perfecting, or defending your title to property may not be currently deducted. However, these costs can qualify as capital expenditures, which are added to the basis of the property.
Persons seeking a divorce may not deduct fees for the divorce, but they may deduct fees for tax advice related to the divorce. Be sure to get these details stated separately on invoices so you can support the deduction. No expenses related to tax-free income are ever deductible.